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Video: Economic analysis

Friday’s disappointing jobs report contributed to a broad sell-off on Wall Street Friday and did little to change the view that the Federal Reserve will keep raising short-term interest rates slowly and steadily.

The economy added only 110,000 jobs in March, the Commerce Department said, the weakest performance in eight months and far short of the 220,000 predicted by the so-called consensus forecast. In fact the figure was lower than virtually any mainstream economist had predicted.

“This is an entirely disappointing report, especially in the context of a business cycle expansion that is well into year No. 4,” said David Rosenberg, chief North American economist for Merrill Lynch.

But while job growth disappointed — again — the report contained enough positive elements to bolster the view that the economy is still expanding rapidly enough to justified the Fed’s continued vigilance against inflation, especially when coupled with other recent data.

The unemployment rate, measured separately from the survey used to calculate payroll growth, dropped back to 5.2 percent by 5.4 percent, matching its lowest level in more than three years. And average hourly wages rose 0.3 percent to $15.95, slightly higher than expected.

Stock prices initially held steady when the market opened after the employment report, but a sell-off gained momentum after a snapshot of the economy’s performance in March was released by the Institute of Supply Management, a respected business group. The Dow Jones industrial average was down almost 100 points, or 1 percent, at the closing bell.

The ISM’s manufacturing survey indicated slight but steady growth for the factory sector, but the manufacturing price index shot up to its highest level since November, probably a reflection of this year’s sharp increases in prices for crude oil and other commodities, said Lynn Reaser, chief economist for Banc of America Capital Management.

The ISM’s monthly report on the non-manufacturing sector also was mistakenly released and showed service industries unexpectedly picking up speed.

For nervous investors, the reports added up to an unfriendly set of signals about the potential for more inflation, said Ethan Harris, chief U.S. economist for Lehman Bros.

Ever since
the Federal Reserve warned last week
that inflation pressures have “picked up in recent months,” investors have become hypersensitive to signs of faster price growth and the prospect that the central bank would have to respond by raising rates more aggressively.

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“That has become the new bogeyman in the market,” Harris said. He said the latest signs of slower growth and slightly faster inflation were not a serious cause for concern but gave stockholders an excuse to sell.

Rich Yamarone, economic research director at Argus Research, agreed, saying in a note that "this softer pace of job creation is not alarming, but consistent with an economy that is in a moderating mode."

But he warned of an "oil-induced soft patch," much like the one seen in 2004, that could lead to a string of subpar employment reports.

The latest payroll figure was particularly disappointing after the robust growth in February, when the employers added 243,000 jobs. In the economic expansion of the late 1990s, the economy regularly added 250,000 to 300,000 jobs a month and sometimes far more.

Other than a brief three-month stretch last year, that kind of growth has not been seen in the current expansion that began in late 2001. And given the Fed’s determination to raise interest rates — and the transformation of the world economy over the past decade — it seems unreasonable to expect such strong growth anytime in the near future.

“If you keep getting a number that is a lot lower than you expect, then you either have to change your expectations or continue to be disappointed,” said John Silvia, chief economist at Wachovia Securities.

He and other analysts say companies have become more adept at squeezing production out of their existing permanent and temporary workers, even in the face of rising demand.

“We continue to see an economy where the productivity really does make a difference,” Silvia said.

Like most analysts, Silvia expects the Fed to raise benchmark short-term rates steadily by a quarter-percentage point at each of the next two scheduled meetings of policy-makers, and probably beyond. There is currently no reason to expect a more aggressive half-point increase from the central bank, he said.

Even with the relatively slow employment growth, the economy probably grew at a respectable 4 percent rate in the just-ended first quarter, said Ed McKelvey, senior economist at Goldman Sachs. But in the second half of the year, growth is likely to slow as the long series of Fed rate hikes begins to bite and overextended consumers begin to pull back on spending, he said.

“Look for the economic slowdown to commence in the second half of the year,” agreed Rosenberg of Merrill Lynch.

He pointed out that over the past 20 years the economy has consistently slowed beginning about a year after the Fed began to raise rates.